Financial Planning Can Be Scary For Investors

Defunct television shows aside, advisors say that many people are paralyzed when it comes to financial planning.

But are people scared because they don’t have a financial plan? Or do they not bother making plans because they are scared?

“It’s a combination of both,” said Kenneth A. Moraif, senior advisor with Money Matters, a financial planning firm in the Southwest. “People are scared, and I think that’s a good percentage of people who have not created a financial plan. Another large percentage feels they don’t have enough money or are overwhelmed by bills.”

About 14 percent of respondents to a recent survey sponsored by Nationwide found that creating a plan is simply too overwhelming.

Investor fears, said Michael Spangler, president of Nationwide Funds, are “legitimate and overwhelming, which is why you get this set of responses.”

But where do advisors go from here?

Moraif’s counsel is for advisors to stop beating people over the head about how they are not saving enough.

“We’re taught in planner school to have clients do a budget and then see where you can cut,” he said in an interview with InsuranceNewsNet. “That’s a wasted exercise.”

Moraif said that slashing budgets one item at a time isn’t effective. He said that investors will spend on the goods that they want. He said that, instead of a what-can-you-go-without strategy, investors would be better off cutting down on the frequency and volume of certain purchases. Advisors can help investors formulate a strategy that is more proportionate to their income.

For example, they could choose to go to the movies three times a month instead of four.

Funnel the difference into a retirement account, even if it’s $100. “If you do less of it, you don't notice as much when you cut back, then you build on that,” Moraif said. “Then you go from $100 to $200 a month. You start small.”

The Nationwide survey found that one of four respondents does not have a financial plan. Survey respondents raised the usual objections to not setting enough money aside: Their assets are too low and advisor fees are too high.

A separate survey by Wells Fargo found that 69 percent of Americans in their prime retirement savings period between 40 and 59 years old don’t have a financial plan. For some, the future no longer even includes retirement.

Those with a plan say they have saved a median of $63,000, or 32 percent of their goal, while whose without a plan have only saved a median of $20,000, or 10 percent of their goal, according to the Wells Fargo Middle Class Retirement study. Both those with a plan and those without one say they will need a median nest egg of $200,000 for retirement.

“This data so clearly shows what a difference a retirement plan makes, in that people who have a plan have saved three times those without a plan have saved,” Laurie Nordquist, chief of Wells Fargo Institutional Retirement and Trust, said in a statement.

Other surveys point to an enduring irony about finance and planning: the less people plan, the more scared they are; and the more scared they are, the lower the incentive to plan. A 2011 survey by Financial Engines, an investment advisory firm based in Palo Alto, Calif., found that fear about the financial future inhibits investors.

In an interview with InsuranceNewsNet, Spangler said advisors need to “acknowledge those fears are real and legitimate,” particularly in the wake of the financial crisis during which many investors saw an evaporation of wealth.

But much of the losses have recovered, and the stock market this year is way ahead of its long-term average.

Spangler said advisors should dispel the idea that advice necessarily costs a lot of money. Then they need to explain to investors’ what their likely future needs are going to be in “terms they can understand,” Spangler said.

Spangler said that fear and risk can’t be completely eliminated. But he also said that advisors should explain how they can lessen the impact of down markets and recover.

He said that the sooner advisors do that, the better off investors and their families are likely to be. The Nationwide survey found that there is time to make significant improvement in the management of assets and planning for retirement. Only 1 percent of those not working with an advisor said that it was too late to work with an advisor, the Nationwide survey found.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].